What does it indicate when a stock is considered overvalued?

When a stock is considered overvalued, it indicates that its current market price exceeds its intrinsic value. Intrinsic value is the true or inherent worth of a company, based on fundamentals such as earnings, dividends, growth potential, and overall financial health. An overvaluation suggests that investors may be paying more than what the company's future cash flows and profits would support.

This condition often arises from speculative trading or overly optimistic market sentiments rather than sound investment fundamentals. Investors might be drawn to the stock due to hype or trends, leading to inflated prices detached from the underlying reality of the company's performance. Recognizing overvalued stocks is crucial for investors aiming to make informed decisions, as these stocks may eventually adjust downward to align with their intrinsic value once the market corrects itself.